FERC Initiates NGA Section 5 Investigations into Three Gas Pipelines’ Rates, Terminates Nine Other Proceedings in Response to Form 501-G Filings

On January 16, 2019, FERC launched investigations and initiated hearings pursuant to Natural Gas Act (“NGA”) section 5 into three natural gas pipeline companies in response to their Form No. 501-G filings to explore whether they have been over-recovering their costs of service. Separately, FERC also found that nine other gas companies sufficiently complied with FERC’s directives in Order No. 849 and terminated their Form No. 501-G proceedings without taking any further action.

In December 2017, President Donald Trump signed into law the Tax Cuts and Jobs Act, which lowered the federal corporate income tax rate from 35 percent to 21 percent. In response to the federal income tax reduction, as well as its separate finding that certain tax pass-through entities should not be permitted to include an income tax allowance in their cost of service, FERC issued Order No. 849 in July 2018, which required certain pipelines to make the one-time informational Form No. 501-G filing (see July 24, 2018 edition of the WER). In doing so, FERC explained that the purpose of the Form No. 501-G procedures is to provide FERC and interested stakeholders with information to determine whether pipelines’ rates are no longer just and reasonable.

After pipelines submitted their Form No. 501-G filings in compliance with Order No. 849 (see October 15, 2018 edition of the WER), FERC initiated NGA section 5 investigations into three natural gas pipelines based on the Form No. 501-G:

• Bear Creek Storage Company, L.L.C. (“Bear Creek”)

In Bear Creek’s Form No. 501-G filing, Bear Creek estimated a return on equity (“ROE”) of 16.3 percent after inclusion of the income tax reduction, but argued that no rate reduction was needed because Bear Creek’s Form No. 501-G did not accurately reflect its capital structure and because Bear Creek’s two customers – two other interstate pipelines – were subject to rate moratoria and thus could not pass through the reduction in rates until their moratoria ended. In initiating an NGA section 5 investigation into Bear Creek’s rates, FERC noted that Bear Creek made no commitment to reduce its rates before the end of its customers’ rate moratorium and that initiating an NGA section 5 rate investigation would ensure any reduction in Bear Creek’s rates occurs by the end of one of its customers’ rate moratorium.

• Northern Natural Gas Company (“Northern”)

Northern argued in its Form No. 501-G filing that no rate adjustment was needed because, among other things, it had expended significant amounts of money to modernize its plant and because its customers would benefit from Northern investing its tax savings into ongoing modernization programs. However, FERC stated that while it was necessary to take into consideration Northern’s increased costs, it should also take into account Northern’s increased revenues. Since FERC calculated $115 million in additional revenues for Northern’s first two reporting quarters in 2018 compared to the same period for 2017, FERC estimated that Northern’s ROE in 2018 is 17.3 percent, and therefore Northern may be over-recovering its cost of service.

• Panhandle Eastern Pipe Line Company, LP (“Panhandle”)

Panhandle contended in its addendum to its Form No. 501-G that no rate change was necessary. Panhandle stated that it was a separate tax paying entity with a total ROE of 14.2 percent. In initiating an NGA section 5 investigation into Panhandle’s rates, FERC stated that Panhandle entered into a new firm transportation contract with another pipeline that would significantly increase Panhandle’s jurisdictional transmission revenues and could allow Panhandle to recover revenue substantially in excess of its cost of service. In addition, FERC noted that Panhandle was wholly owned by a master limited partnership, which raised concerns about whether Panhandle could argue that it should be treated as a tax paying entity.

Further, FERC terminated the Form No. 501-G proceedings for nine other pipelines. FERC stated, in a separate order, that those pipelines either “filed a limited NGA section 4 rate reduction filing, filed a prepackaged settlement, or provided explanations as to why no rate change is necessary . . . and no party filed adverse comments with respect to their FERC Form No. 501-G filings.” Accordingly, FERC terminated the Form No. 501-G proceedings for these pipelines without taking any further action.

The initiation of NGA Section 5 investigations into Bear Creek, Northern, and Panhandle can be found here, here, and here respectively.

FERC’s decision to terminate Form No. 501-G proceedings into nine other pipelines can be found here.